Capital Budgeting Exercise

Instructions: leave all answers, whether in $, %, or years, to 2-decimal places.

Q1A project will cost $2.0 million. The company uses a 10% discount rate as a threshold for accepting capital projects. It is expected to have a 5 year life and return the following:

t:0 1 2 3 4 5

CF0CF1CF2CF3CF4CF5

Year0Year1Year2Year3Year4Year52014 Summer2

??$400,000 $500,000 $600,000 $800,000 $700,000

k = ??%

a) Calculate the project’s Net Present Value (NPV).

NPV = <== use "NPV" Excel formula

b) Calculate the Profitability Index (PI).

PI = <== no Excel formula for this

<probably need to show some PI work below>

NPV of all POSITIVE CFs: (1)take (1) divided by (2) to get PI;

NPV of all NEGATIVE CFs: (2)ignore negative sign in (2); PI is always positive

c) Calculate the Internal Rate of Return (IRR).

IRR = <== use "IRR" Excel formula

d) Calculate the Payback Period (PB).

PB = <== no Excel formula for this

<probably need to show some PB below>

e) Calculate the Discounted Payback Period (DPB).

DPB = <== no Excel formula for this

<probably need to show some DPB work here>

f) Assuming the funds can be invested at 5% [RI], calculate the Terminal Value (TV) and the MIRR.

RI =??%

MIRR = <== use "MIRR" Excel formula

TV = <== TV is the Net Future Value (NFV) of all [positive] cash inflows in the project.

<no Excel formula for TV; probably need to show some TV work here>